Disciplining Agricultural Support through Decoupling

Abstract:     
Agricultural protection and subsidies, particularly in high-income countries, have induced overproduction, thereby depressing world commodity prices and reducing export shares of countries which do not support agriculture. One - and perhaps the only - effective way to bring a socially acceptable and politically feasible reform is to replace payments linked to current production levels, input use, and prices by payments which are decoupled from these measures. This paper describes the objectives and consequences of agricultural support, surveys the theory and practice of decoupling agricultural support, and gives a number of policy recommendations on how to improve decoupled support mechanisms.

Overall, the experience with decoupling has been mixed while the switch to less distorting support has been uneven across commodities and countries. Ideally, compensation programs would be universal (open to all sectors in the economy, not just agriculture) or at least non-sector specific within agriculture. The paper describes a simple and minimally distorting scheme that would maintain government credibility and reduce uncertainty.

Working Paper Series